Equity Accounting versus Pro-Rata Consolidation

Equity Accounting versus Pro-Rata Consolidation Approach
In joint ventures, accounting is typically performed using different approaches depending on the preferences of the investing partners. Commonly used accounting options are the equity investment approach and the pro-rate consolidation method. The use of these methodologies is highly dependent on the intrinsic characteristics of the shared venture, and therefore each procedure has its unique application contexts. This memo, therefore, outlines conditions in which the pro-rata consolidation methodology may be appropriate, as well as offers recommendations on the ideal consolidation method to be used in the provided case study.
A potential ideal situation where the pro-rate approach may be desirable is in instances where there are undivided interests. This situation is often characterized by an investor lacking ownership interests in legal entities. Instead, the investors tend to have undivided ownership interests in the asset and be liable in proportional terms for each liability in the company’s stocks. Given this characteristic, the reporting entity is typically outside the scope of the equity method, and as a result, proportional consolidation is considered appropriate.
Unlike the equity approach, the pro-rata consolidation paradigm is dependent on various factors, some of which are dependent on the industry. For instance, in real estate investments where the assets are subject to joint control from the two investors, the selected investment would be in accordance with the ASC 323 since this approach offers guidance in the ASC 970-323-25-12. Subsequently, this implies that the proportionate presentation of the returns would be overlooked. In contrast, in the utility industry, unique considerations for undivided interests must be made based on SEC Staff accounting (Erl

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